Slow Money Dissemination
Title: Slow Money Dissemination
Author: ENDERS, Zeno
Publisher: European University Institute
Series/Report no.: EUI ECO; 2006/25
A model of limited participation in the asset market is developed, in which varieties of consumption bundles are purchased sequentially. By this, heterogeneity in money holdings and in the effective elasticity of substitution of consumers arises, which affects optimal markups chosen by oligopolistic firms. The model generates a short-term inflation-output trade off, although all firms can set their optimal price each period and no informational problems exist. The responses are persistent even after a one-time monetary shock due to an internal propagation mechanism that stems from the slow dissemination of newly injected money. Furthermore, a liquidity effect, countercyclical markups, procyclical profits and marginal costs after monetary shocks are obtained. The model is simple and tractable, such that analytical results for the linearized model can be derived.
Subject: Limited Participation; Countercyclical Markups; Liquidity Effect; Phillips Curve; Oligopolistic Competition
Type of Access: openAccess